New Zealand Emissions Trading Scheme

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The New Zealand Emissions Trading Scheme (NZ ETS) is a partial-coverage all-free allocation uncapped highly internationally linked emissions trading scheme. The NZ ETS was first legislated in the Climate Change Response (Emissions Trading) Amendment Act 2008 in September 2008 under the Fifth Labour Government of New Zealand[1][2] and then amended in November 2009[3] and in November 2012[4] by the Fifth National Government of New Zealand.

The NZ ETS covers forestry (a net sink), energy (43.4% of total 2010 emissions), industry (6.7% of total 2010 emissions) and waste (2.8% of total 2010 emissions) but not pastoral agriculture (47% of 2010 total emissions).[5] Participants in the NZ ETS must surrender one emission unit (either an international 'Kyoto' unit or a New Zealand-issued unit) for every two tonnes of carbon dioxide equivalent emissions reported or they may choose to buy NZ units from the government at a fixed price of NZ$25.[6]

Individual sectors of the economy have different entry dates when their obligations to report emissions and surrender emission units take effect. Forestry, which contributed net removals of 17.5 Mts of CO2e in 2010 (19% of NZ's 2008 emissions,[7]) entered the NZ ETS on 1 January 2008.[8] The stationary energy, industrial processes and liquid fossil fuel sectors entered the NZ ETS on 1 July 2010. The waste sector (landfill operators) entered on 1 January 2013.[9] Methane and nitrous oxide emissions from pastoral agriculture are not included in the NZ ETS. (From November 2009, agriculture was to enter the NZ ETS on 1 January 2015[6])

The NZ ETS is highly linked to international carbon markets as it allows the importing of most of the Kyoto Protocol emission units. It also creates a specific domestic unit; the 'New Zealand Unit' (NZU), which will be issued by free allocation to emitters, with no auctions intended in the short term.[10] Free allocation of NZUs will vary by sector. The commercial fishery sector (who are not participants) will receive a free allocation of units on a historic basis.[6] Owners of pre-1990 forests will receive a fixed free allocation of units.[8] Free allocation to emissions-intensive industry,[11][12] will be provided on an output-intensity basis. For this sector, there is no set limit on the number of units that may be allocated.[13] The number of units allocated to eligible emitters will be based on the average emissions per unit of output within a defined 'activity'.[14] Bertram and Terry (2010, p 16) state that as the NZ ETS does not 'cap' emissions, the NZ ETS is not a cap and trade scheme as understood in the economics literature.[15]

Some stakeholders have criticized the New Zealand Emissions Trading Scheme for its generous free allocations of emission units and the lack of a carbon price signal (the Parliamentary Commissioner for the Environment),[16] and for being ineffective in reducing emissions (Greenpeace Aotearoa New Zealand).[17]

The NZ ETS was reviewed in late 2011 by an independent panel, which reported to the public in September 2011.[18] In response, the NZ ETS was amended in November 2012.[4]

Economics[edit]

Pricing the externality[edit]

An emissions trading scheme for greenhouse gas emissions (GHGs) works by establishing property rights for the atmosphere (Goldemberg et al.., 1996, p. 29).[19] The atmosphere is a global public good, and GHG emissions are an international externality (p. 21). The emissions from all sources of GHGs contribute to the overall stock of GHGs in the atmosphere. In the cap-and-trade variant of emissions trading, a limit on access to a resource (the cap) is defined and then allocated among users in the form of permits. Compliance is established by comparing actual emissions with permits surrendered including any permits traded within the cap.[20] The environmental integrity of emissions trading is depends on the setting of the cap, not the decision to allow trading.[21]

Efficiency and equity[edit]

For the purposes of analysis, it is possible to separate efficiency (achieving a given objective at lowest cost) and equity (fairness) (Goldemberg et al.., 1996, p. 29). Economists generally agree that to regulate emissions efficiently, all polluters need to face the full costs of their actions (that is, the full marginal social costs of their actions) (pp. 29, 37). Regulation of emissions that is applied only to one economic sector or region drastically reduces the efficiency of efforts to reduce global emissions (p. 30). There is, however, no scientific consensus over how to share the costs and benefits of reducing future climate change (mitigation of climate change), or the costs and benefits of adapting to any future climate change (see also economics of global warming).

Carbon leakage[edit]

A domestic ETS can only regulate the emissions of the country having the trading scheme. In this case, GHG emissions can "leak" (carbon leakage) to another region or sector with less regulation (p. 21). Leakages may be positive, where they reduce the effectiveness of domestic emission abatement efforts. Leakages may also be negative, and increase the effectiveness of domestic abatement efforts (negative leakages are sometimes called spillover) (IPCC, 2007).[22] For example, a carbon tax applied only to developed countries might lead to a positive leakage to developing countries (Goldemberg et al., 1996, pp. 27–28). However, a negative leakage might also occur due to technological developments driven by domestic regulation of GHGs (Barker et al.., 2007).[23] This can help to reduce emissions even in less regulated regions.

Competitiveness risks[edit]

One way of addressing carbon leakage is to give sectors vulnerable to international competition free emission permits (Carbon Trust, 2009).[24] This acts as a subsidy for the sector in question. Free allocation of permits was opposed by the Garnaut Climate Change Review as it considered there were no circumstances that justify it and that governments could deal with market failure or claims for compensation more transparently with the revenue from full auctioning of permits.[25] The economically efficient option would, however, be border adjustments (Neuhoff, 2009;[26] Newbery, 2009).[27] Border adjustments work by setting a tariff on imported goods from less regulated countries. A problem with border adjustments is that they might be used as a disguise for trade protectionism (Grubb et al., p. 5).[28] Some types of border adjustment may also not prevent emissions leakage.

Issuing the permits: 'grandfathering' vs auctions[edit]

Tradable emissions permits can be issued to firms within an ETS by two main ways: by free allocation of permits to existing emitters or by auction.[29] Allocating permits based on past emissions is called "grandfathering" (Goldemberg et al.., 1996, p. 38). Grandfathering permits, just like the other option of selling (auctioning) permits, sets a price on emissions. This gives permit-liable polluters an incentive to reduce their emissions. However, grandfathering permits can lead to perverse incentives, e.g., a firm that aimed to cut emissions drastically would then be given fewer permits in the future. Allocation may also slow down technological development towards less polluting technologies (Fisher et al., 1996, p. 417).[30] The Garnaut Climate Change Review noted that 'grandfathered' permits are not 'free'. As the permits are scarce they have value and the benefit of that value is acquired in full by the emitter. The cost is imposed elsewhere in the economy, typically on consumers who cannot pass on the costs.[25] However, profit-maximising firms receiving free permits will raise prices to customers because of the new, non-zero cost of emissions.[31]

A second method of "grandfathering" is to base allocations on current production of economic goods, rather than historical emissions. Under this method of allocation, government will set a benchmark level of emissions for each good deemed to be sufficiently trade exposed and allocate firms units based on their production of this good. However, allocating permits in proportion to output implicitly subsidises production.[32] Garnaut considers that any method for free permit allocation will have the disadvantages of high complexity, high transaction costs, value-based judgments, and the use of arbitrary emissions baselines.[25]

On the other hand, auctioning permits provides the government with revenues. These revenues could be used to fund low-carbon investment, and also fund cuts in distortionary taxes. Auctioning permits can therefore be more efficient and equitable than allocating permits (Hepburn, 2006, pp. 236–237).[33] Ross Garnaut states that full auctioning will provide greater transparency and accountability and lower implementation and transaction costs as governments retain control over the permit revenue.[25]

Such recycling of revenue from permit auctions could offset a significant proportion of the economy-wide social costs of a cap and trade scheme.[34] As well as reducing tax distortions, Kerr and Cramton (1998) note that auctions of units are more flexible in distributing costs, they provide more incentives for innovation, and they lessen the political arguments over the allocation of economic rents.[35]

Lobbying for free allocation[edit]

According to Hepburn (2006, pp. 238–239),[33] “it should be expected that industry will lobby furiously against any auctioning.” Hepburn et al. (2006) state that it is an empirical fact that while businesses tend to oppose auctioning of emissions permits, economists almost uniformly recommend auctioning permits.[36] Garnaut notes that the complexity of free allocation, and the large amounts of money involved, encourage non-productive rent-seeking behaviour and lobbying of governments, activities that dissipate economic value.[25]

New Zealand allocation[edit]

In respect of the 2009 amendments to the NZ ETS, intensity-based allocation was favoured over allocations based on historical emissions by business groups, and representatives of large emitters,[37] by Fonterra[38] and by Federated Farmers.[39] Environmental organisations and opposition political parties opposed intensity based allocations.[16][17][40]

Economic modelling[edit]

In June 2009, Nick Smith released an economic modelling report on the NZ ETS by economic consultants NZIER and Infometrics which had been prepared for the Emissions Trading Scheme Review Committee. Smith stated that the report supported the Government's intention to modify the NZ ETS.[41] The report "Economic modelling of New Zealand climate change policy"[42] created static computable general equilibrium (CGE) models using 2008 emissions projections. The terms of reference set the policy options to look at as the 2008 NZETS vs the least-cost option for meeting the Kyoto liability vs a revenue-neutral tax on carbon equivalents.

The impacts of the various options were estimated as the differences between a carbon tax and a reference ‘business as usual’ scenario assuming New Zealand had not signed the Kyoto Protocol. The variables changed in the model runs were the NZ carbon price ($0, $10, $25 or $100), the world carbon price, the duration (short term to 2012, long term to 2025), the level of free allocation and whether the Government assumed all Kyoto liabilities. The results of each model run was reported as the percent difference from the 'no-Kyoto' ‘business as usual’ scenario in 2012 or 2025.[43]

The report noted several limitations of computable general equilibrium models that should be kept in mind in interpreting the results: CGE models are only an approximation of highly complex real economies, results can only ever be indicative (p16), and are highly dependent on the structure of the models and the input assumptions and on the assumption that other variables remain constant. Therefore the "interpretation of CGE results should centre on their direction (up or down) and broad magnitude (small, medium or large), rather than on the precise point estimates that the model produces".[44]

The report's bolded conclusion was that a narrow carbon tax or trading scheme was the least cost option in the short-term (p 40). Predicted reductions in GHG emissions ranged from 0% (Govt pays), 0.4% to 2.8% for a $25 carbon price and 3% to 4% for a $50 price.[45]

However, the report noted that there was little difference in costs between the government paying all and the ETS with free allocation, as all the model results indicated small reductions (-0.1% and -0.4%) in Gross National Disposable Income compared to ‘business as usual’.[46]

The amendments of 2009[edit]

History[edit]

In 2002, the Fifth Labour Government of New Zealand adopted the Climate Change Response Act 2002 (the Act) in order for New Zealand to ratify the Kyoto Protocol and to meet obligations under the United Nations Framework Convention on Climate Change.[47]

In 2008, the Labour Government enacted the Climate Change Response (Emissions Trading) Amendment Act 2008 which added the first version of the New Zealand Emissions Trading Scheme to the Climate Change Response Act 2002.[2] The Labour Government subsequently lost the 2008 New Zealand election to the coalition led by National Party, who had campaigned on amending the NZ ETS.

In December 2008, the National-led Government set up the Emissions Trading Scheme Review Committee to review the NZ ETS. The committee provided a report nine months later on 31 August 2009.

In early September 2009, Rod Oram predicted that the National Government's goals would be; to adopt intensity-based allocation of free carbon credits to export industries; have no cap on greenhouse gas emissions; to have a temporary cap on the price of carbon; to delay bringing in sectors into the NZETS; to delay phasing out free emission units; and, maximum alignment with the Australian Carbon Pollution Reduction Scheme. Oram viewed these changes as significantly weakening the incentives to reduce emissions and to plant carbon forests.[48]

On 14 September 2009, the National Government Minister for Climate Change Issues Nick Smith announced that it had reached an agreement with the Māori Party about revisions to the NZ ETS and that an amending bill would be drafted in order to “make the ETS workable and affordable”.[49]

On 24 September 2009, the Climate Change Response (Moderated Emissions Trading) Amendment Bill had its first reading in Parliament and was sent to the Finance and Expenditure Select Committee for public submissions.[50]

Submissions to the Finance and Expenditure Committee[edit]

Between 15 October 2009[51] and the date of its final report, 16 November 2009, the Finance and Expenditure Committee received 399 submissions on National's draft bill.[52]

Lack of a cap on emissions[edit]

In 2007, the Ministry for the Environment released a detailed report The Framework for a New Zealand Emissions Trading Scheme which stated the NZ ETS would not have a binding, absolute limit on the total level of emissions allowed in New Zealand. While the quantity of domestic NZ Units gifted to eligible emitters would be fixed, the quantity of international 'Kyoto-compliant' units that could be imported in to match emissions would not be limited.[53] In consequence, as there is no limit on the volume of international emissions units (CERs and ERUs) that may be imported, there is no cap or limit on the volume of emissions permitted in New Zealand provided that emissions units are imported into the country and surrendered. In that respect, the NZ ETS is unlike most other emissions trading schemes,[54]

Ministry for the Environment Fact Sheet 16 stated “There is no cap on the emissions that occur within New Zealand.” However, the Ministry for the Environment still regarded the NZ ETS as operating within the cap on emissions established by the Kyoto Protocol for the first commitment period of 2008–2012.[55] Moyes (2008) describes this as a “flexible cap” where New Zealand sourced emissions regulated by the NZETS are constrained only by the international market price for GHG emissions.[54]

Nick Smith's press release of September 2009 announced that the method to allocation NZ units to trade exposed and emissions intensive firms would now be based on average industry production, where the levels of units allocated would vary in proportion to a firm production.[49][56]

In combination with the unlimited use of internationally sourced Kyoto units, the allocation of New Zealand units to eligible emitters in proportion to their production means that there is no cap on total emissions within New Zealand.[13]

There is also no cap on total emissions during the transition period as the Government will supply the market with unlimited New Zealand units at the fixed price of NZ$25 per NZU.

For the free allocation of units to agriculture, there are no eligibility tests. Allocations to agricultural activities will also be made on an intensity basis. The baseline will be the sector average emissions per unit of output.

Allocation of NZ Units to Trade-Exposed Activities[edit]

Under the NZ ETS, all NZ Units will be distributed into the market by free allocation (gifting). There is no intention in the short term to auction any NZ Units.[57] 'Emissions-intensive' and 'trade-exposed' (EITE) activities are designated a benchmark level of emissions per unit of production. For example, x amount of carbon dioxide equivalent emissions per tonne of steel. Firms then receive an allocations based on their expected production of the emissions intensive good.

This method of allocation is often referred to as 'intensity based allocations'. Intensity based allocations are allocations that are based on the volume of production of a firm.[58] Allocations are given at the beginning of the period and then balanced at the conclusion to reflect actual output.

The benchmark (or allocative baseline) for free allocation for firms considered emissions-intensive and trade-exposed includes compensation for electricity price increases.[59]

Fiscal impact of allocation[edit]

From the 2008 election, the policy of the National Party[60] was that the NZ ETS should be fiscally neutral, in the sense of a Government policy where any new taxes or revenues equal any new spending[61] The policy of a fiscally neutral NZ ETS was confirmed by John Key[62] Bill English,[63] and Nick Smith in his speech on the third reading of the Climate Change Response (Moderated Emissions Trading) Amendment Act 2009.[64]

The cost of free allocation of units to emitters is a highly contentious subject. The Sustainability Council argued that the allocation of units to industry is highly costly to taxpayers.[65]

Dr Christina Hood, a climate change and energy policy consultant, submitted to the Finance and Expenditure Select Committee that the use of uncapped intensity based allocation of units will result in a taxpayer subsidy to emitters of about $NZ105 billion up to 2050.[66]

Economist Geoff Bertram estimated that at a carbon price of $NZ50 a tonne, the cost to taxpayers of the free allocation of NZ units to emitters will be $NZ99 billion between 2010 and 2091.[67]

Nick Smith's Cabinet Paper noted that the New Zealand Treasury had estimated that the long-term costs of intensity-based allocation of units to industry and agriculture would be 'very significant', in the order of $NZ900 million per annum by 2030.[68]

The Clerk of the House invited Economist Dr Suzi Kerr to give independent specialist advice on the Climate Change Response (Moderated Emissions Trading) Amendment Bill. Kerr's advice was that the free allocation of emission units significantly raised the overall cost of the NZ ETS to the economy and transferred it to taxpayers.[69]

Decrease in allocation of units[edit]

There is no specific sunset clause to remove the allocation of units to firms that undertake emissions-intensive and trade-exposed activities. The legislation stipulates that allocations must be reviewed no less than once every 5 years by a review panel. Climate Change Minister Nick Smith has stated that estimates of fiscal impacts beyond 2020 at the present time are meaningless as there are simply too many unknowns.[70]

The level of allocations per unit of output for EITE activities will decrease at 1.3% per year from 2013, however, as production may increase, allocations may also increase over time.[71]

Transitional Assistance[edit]

The NZ ETS contains special transitional provisions from 1 July 2010 (when fossil emissions enter the scheme) until 31 December 2012 (transition period). This end date coincides with the end date of the Kyoto Protocol. Although transitional measures are legislated to end after 2012, the Government has suggested that they will be extended in the event that major trading partners such as the USA and Australia do not implement emissions trading schemes of their own before then.[72]

During the transition period participants in energy, fossil fuels and industry will only need to surrender one NZU for two tonnes of carbon dioxide equivalent emissions. Free allocation of units to energy-intensive and trade-exposed activities will also be halved. Secondly, participants may pay a fixed price of NZ$25 instead of buying and surrendering units. This measure means that firms will face a cost of no higher than NZ$12.50 per tonne of emissions. There is a restriction on the sale of units oversea during this transition period, except for forest removal credits.[6]

Delayed entry for agricultural emissions[edit]

Agricultural emissions, methane from enteric fermentation and manure management as well as nitrous oxide from animal effluent and fertiliser, are not legislated to enter the scheme until 1 January 2015. Information released by Nick Smith (Minister for Climate Change Issues) stated that the reason for this was due to the difficulties in measuring and monitoring agricultural emissions and the lack of possible mitigation opportunities meaning limited reductions would likely result.[73]

The economic modelling conducted by NZIER and Infometrics stated:

If the aim of climate change mitigation policies is to change producers’ behaviour, it is vital to be able to measure emissions in a cost effective manner. If the transaction costs of measuring emissions outweigh the benefits of emissions reduction, the policy may not be net welfare enhancing. Therefore the transaction costs of implementing an all-sectors all-gases ETS need to be evaluated. It may be advisable to exempt sectors such as agriculture where measurement costs are high relative to the benefit that would be gained from that sector’s inclusion. Our modelling suggests that, in the short term, such exemptions do not reduce economy wide welfare.

Stroombergen et al 2009[42]

The Parliamentary Commissioner for the Environment considered that there was insufficient evidence to justify leaving agriculture out of the NZ ETS until 2015.[71] A submission from the Institute of Policy Studies (New Zealand) and The New Zealand Climate Change Research Institute considered that the delayed entry of agriculture into the NZ ETS will reduce long term competitiveness of the New Zealand economy by supporting industry that can not compete in an emissions constrained world.[74]

The Climate Change Response (Moderated Emissions Trading) Amendment Act 2009[edit]

Adoption[edit]

On 25 November 2009, the bill had its second and third readings[3] and it was adopted by 63 votes to 58, with the support of the National Party (58 votes), the Maori Party (4 votes) and United Future (1 vote).[75] The Labour Party (43 votes), the Greens (9 votes), ACT (5 votes) and the Progressive Party (1 vote) voted against the third reading.[52]

On 7 December 2009, the Climate Change Response (Moderated Emissions Trading) Amendment Act 2009 received the royal assent.[50]

Technical Details[edit]

The Climate Change Response (Moderated Emissions Trading) Amendment Act 2009 established an emissions trading scheme with obligations on emissions from all sectors and all gases.[3][73] From 2015, the technical details can be summarised as:

  • All emissions from all sources will have obligations. This includes emissions from biological sources such as methane from enteric fermentation and nitrous oxide from animal effluent.
  • Allocations will be made to firms who undertake activities that are deemed to be both 'trade-exposed' and 'emissions-intensive'. Moderately emissions intensive activities will receive allocations equal to 60% of the industry average for the financial years ending 2007, 2008 and 2009. Highly emissions intensive industries will receive allocations equal to 90% of the industry average for this period. Allocation per unit of output will decrease by 1.3% per year from 2013 (on an exponential basis rather than a summation basis).
  • As allocations are based on production levels, allocations are not 'capped' at any specific level.
  • Moderately emissions intensive activities are those that produce more than 800 tonnes of carbon dioxide equivalent emissions per million dollars of revenue. Highly emissions intensive activities are those that produce more than 1600 tonnes per million dollars of revenue.
    • Electricity generators will not receive allocations, however a firm may receive allocation for electricity use if it conducts an 'emissions intensive' and 'trade exposed' activity (EITE).
    • Liquid fossil fuel is excluded from allocation in all instances.
  • Owners of forests planted after 31 December 1989 are able to 'opt-in' to the scheme and receive units for forest sequestration. If these forests are removed from the land the owner must repay these units.
  • Owners of land that was in forest on 1 January 1990 and remained in forest on 1 January 2008 must surrender emissions units if they wish to deforest land AND change the land use to a use other than forestry.
  • Agricultural activities will automatically receive a 90% allocation per unit of production, phased out at a rate of 1.3% per year from 2016.

Sector entry dates obligations and allocations[edit]

The proposed sector entry dates, obligations and unit allocation terms of National's proposed NZ ETS are set out in the table below.[6]

Sector Entry date Transitional obligation until December 2012 (CP1) Unit allocation terms
pre-1990 forest 1 January 2008 Fixed surrender price $NZ25/tonne Allocation of 60 free units per hectare to pre-1990 forests (which may be sold internationally), otherwise units to be purchased for deforestation
post-1989 forest 1 January 2008 Fixed surrender price $NZ25/tonne Afforestation (carbon removal) earns units, otherwise units to be purchased for deforestation
Transport (Liquid fossil fuels) 1 July 2010 One emission unit for two tonnes emissions (50%) and fixed surrender price $NZ25/tonne Units to be purchased
Stationary energy 1 July 2010 One unit for two tonnes (50%) and fixed surrender price $NZ25/tonne Units to be purchased
Emission-intensive industrial processes that are not trade-exposed 1 July 2010 One unit for two tonnes (50%) and fixed surrender price $NZ25/tonne Units to be purchased
Trade-exposed emission-intensive industrial processes 1 July 2010 One unit for two tonnes (50%) and fixed surrender price $NZ25/tonne Free allocation on intensity/production basis phasing out from 2013 at 1.3% each year.
Agricultural Gases (methane and nitrous oxide from biological processes) 1 January 2015 No obligation in CP1 except reporting from 1 January 2012. Free allocation on intensity/production basis phasing out from 2016 at 1.3% each year.
Fishing 1 July 2010 Not participants. No requirement to report emissions or surrender NZUs 700,000 NZUs (90% of 2005 emissions) allocated free to fishing quota holders until 1 January 2012.

Units able to be traded[edit]

The NZ ETS created a specific domestic emission unit for use in New Zealand, the New Zealand Unit (NZU). The NZUs are not a Kyoto unit in terms of compliance with the Kyoto Protocol, and can only be surrendered or traded within New Zealand. Assigned amount units (AAUs) issued by New Zealand under the Kyoto Protocol can be also used by emitters to meet their surrender obligations, but assigned amount units issued by other Annex B countries may not be used.[76]

Participants in the NZ ETS are also able to purchase and surrender international Kyoto units such as Emission Reduction Units (ERUs), Certified Emission Reductions (CERs) and Removal Units (RMUs) issued in other countries. Unlike most other emissions trading schemes the NZ ETS has no limit on the volume of international units (CERs and ERUs) that may be imported.[54] Consequently, the NZ ETS is highly linked to the international market for greenhouse gas emission units. This degree of linkage and the lack of a national cap on emissions makes New Zealand a price-taker where control of the price of emissions to firms is relinquished to the international markets.[77]

During the transition phase (July 2010 to December 2012), only the forestry sector will be able to convert the NZUs allocated to them to Assigned amount units that can be sold to overseas buyers.[10][78] However, temporary CERs and iCERS cannot be used in the NZ ETS, and neither can CERs and ERUs generated from nuclear projects.[79]

From 23 December 2011, Certified Emission Reduction units (CERs) from HFC-23 and Nitrous oxide (N2O) industrial gas destruction projects were banned from use in the NZ ETS, unless they had been purchased under future delivery contracts entered into prior to 23 December 2011. The use of CERs from the future delivery contracts ends in June 2013.[80]

Reaction to the Climate Change Response (Moderated Emissions Trading) Act[edit]

Business and farming[edit]

According to Brian Fallow, the New Zealand Herald Economics editor, business lobby groups such as Business New Zealand and the Greenhouse Policy Coalition (representing the energy intensive sector) welcomed the introduction of a temporary price cap and the principle of basing free allocations of units on the basis of intensity of production.[37]

On September 2009, the Greenhouse Policy Coalition described the proposed changes to the NZ ETS as “a welcome move in the right direction”. The Coalition stated that it approved of the half-cost unit surrender obligation in the first commitment period, the $12.50 price cap on carbon, and the slower phase-out of assistance to industry.[81]

Business New Zealand welcomed National's revisions to the NZ ETS of 14 September 2009 as better balancing environmental and economic needs and it stated that it was pleased that the Government had accepted the intensity basis for allocation of units.[82]

The Business Council for Sustainable Development stated that New Zealand was risking 'being left behind' in proposing an all-sectors, all-gases ETS that in 2015 would have almost no impact on heavy emitting industries facing international competition.[83]

Federated Farmers commented that “there is no place for agricultural emissions in the ETS”, “the Government must seek to remove agriculture at Copenhagen in December[84] and that the NZ ETS is “the road to economic hell being paved with good intentions”.[38]

Editorial opinion[edit]

The New Zealand Herald described the Climate Change Response (Moderated Emissions Trading) Bill as “backward legislation” and a “miserable offering to the international effort”.[85]

The Dominion Post commented that the NZ ETS is a failure because “those responsible for the emissions don't have to foot the bill”.[86]

The New Zealand Listener stated “Our poorly thought-out emissions trading scheme does nothing to enhance our reputation” and predicted that the lack of bi-partisan support for the NZ ETS would lead to further uncertainty in New Zealand's climate-change policy.[87]

Commentators[edit]

Rod Oram commented in a Sunday Star Times column that the National Government's changes to the NZ ETS were “a giant step backwards” which would “drive up emissions, perpetuate old technology, necessitate ever-greater subsidies and reduce New Zealand's international competitiveness and reputation.” Oram considered that the amendments to the NZ ETS destroyed its effectiveness. His examples were: removing limits on emissions by adopting intensity-based allocation of free carbon credits, slavishly following climate-laggard Australia, minimising the price incentive by extending the free allocation of credits for 75 years, muting the price signal with a $NZ25 per tonne of carbon cap, forcing forestry holders of credits to sell them overseas because of the $NZ25 per tonne cap, cancelling complementary measures such as fuel efficiency standards, giving in to special pleading via subsidies, and creating uncertainty for business.[88]

Colin James described the National ETS as “...the ETS you have when you are not having an ETS - no cap on emissions (so no "cap" in the "cap-and- trade"), a cap on price (so no "trade", just tickle the taxpayer) and languorous phase-downs of gross emissions which push out hard decisions (if needed) into a misty future[89]

The New Zealand Herald's economics editor Brian Fallow said “Clearly emissions will peak higher and later than they would have done under the existing scheme. But the higher and later the peak in emissions, the steeper and more economically costly the subsequent decline will have to be”.[90]

Political parties[edit]

The Labour Party noted that the allocation of credits to emitters on a 'intensity' basis, with no cap on emissions, meant that emitters would have an incentive to continue to emit greenhouse gases. Taxpayers would have to fund the long period of assistance by allocation of free units to industry at a cost of up to $NZ2 billion by 2030.[91]

Labour Party climate change spokesman Charles Chauvel said that the National NZ ETS “is fundamentally flawed on multiple levels. It is economically irrational, socially inequitable, environmentally counter-productive and fiscally unsustainable”.[92] Chauvel also questioned the fairness of households receiving assistance in the form of the half obligation only until 2013, when large foreign-owned companies such as Methanex, Rio Tinto Alcan NZ Ltd and New Zealand Steel would receive taxpayer support for an extra 90 years.[93]

Jeanette Fitzsimons of the Green Party said "This is the sort of emissions trading scheme you have when you still think climate change is a hoax"[94] and she commented that the NZ ETS would not reduce emissions and would be “the biggest wealth transfer in New Zealand history from the taxpayer to the big polluters”.[95]

John Boscawen of the Act Party commented that the NZ ETS was a grand experiment, without precedent in any other nation in the world. Boscawen was critical of the effect that the ETS will have on households and farmers, stating that the average power bill will rise 10%, fuel bills will rise by 7 cents per litre and dairy farms will face an increase in costs before agriculture enters the scheme of NZ$7,500 per year as a result of associated increases in fuel, electricity and the cost of processing milk products. Boscawen called for the NZ ETS to be scrapped or delayed indefinitely.[96]

Environmental organisations[edit]

Greenpeace Aotearoa New Zealand noted that the intensity-based allocation of NZ Units to industry and the slow phase-out of free units would allow emissions to grow and described the NZ ETS as “pathetic”.[17] Greenpeace's Simon Boxer described the NZETS to TV3 as “the worst emissions trading scheme in the world”.[97]

Gary Taylor, of the Environmental Defence Society, said that “An emissions-trading scheme welcomed by polluters and coal producers is not going to work” and “New Zealand is now a climate change laggard”.[98]

ECO (the Environment and Conservation Organisations of Aotearoa New Zealand) described the NZ ETS as a “major disappointment” and said that “The changes allow 65 large companies long periods of subsidisation by taxpayers, particularly households, right out to 2050, with farmers and the fishing industry getting especially large subsidies.” [99]

World Wide Fund for Nature (WWF) New Zealand described the New Zealand Emissions Trading Scheme as “a complete shambles” because it sets no limit on total pollution, it allows emissions to grow and it transfers the cost of emissions from polluters to taxpayers.[100]

Carbon Trade Watch have described it “as a taxpayer subsidy for plantations and energy companies”.[101]

Parliamentary Commissioner for the Environment[edit]

In October 2009, New Zealand's independent environmental watchdog, Dr Jan Wright, the Parliamentary Commissioner for the Environment, made a submission to the Select Committee considering National's amendments to the NZ ETS. The submission stated that the allocation of free units to industry was too generous and the length of the phase-out of free allocation was too slow. Without a carbon price signal to invest in low carbon technologies, emissions would continue to rise.[16]

In November 2009, Wright was sufficiently concerned that the Climate Change Response (Moderated Emissions Trading) Amendment bill would result in increased emissions that she publicly urged politicians three times not to adopt the National Government's legislation. She opposed the removal of a firm cap on emissions, the reduction of price incentives to reduce emissions, and the heavy subsidies from taxpayers granted to emissions-intensive industry and agriculture by the intensity-based allocation of free units.[102][103][104]

When the Climate Change Response (Moderated Emissions Trading) Act was adopted, Wright said in a radio interview “It's virtually certain our emissions will grow and the burden on the taxpayer will be uncurbed”.[105]

As the energy and liquid fossil fuels were about to enter the NZ ETS in July 2010, Dr Wright expressed her concern that although the NZ ETS was the right framework, the subsidies to big emitters would limit the incentives to reduce emissions and impose significant costs on the taxpayer.[106]

International media[edit]

In November 2009, the Sydney Morning Herald reported that the revised NZETS had been “significantly watered down” and that it gave “big polluters a much easier ride”.[107]

Reuters reported that the amended NZ ETS allowed unlimited imports of offsets and that business groups largely backed the changes, while environmental groups largely felt that the NZ ETS would not do enough to reduce emissions.[108] In March 2010, Reuters reported that the NZ ETS had “no emissions cap nor any limit on the number of free carbon permits for energy-intensive companies that export their products”. Reuters noted that the absence of a cap and the two-tonnes-for-one-unit surrender arrangement had led to “accusations of some big polluters getting a free ride and that the scheme will fail to cut emissions of planet-warming gases”.[109]

In March 2010, The Economist commented on the delayed entry of agriculture into the scheme and noted the environmental concerns over the “generous allocations of free carbon credits to business”.[110]

Review of the New Zealand ETS and 2012 amendments[edit]

The Climate Change Response Act 2002 requires a review of the NZ ETS by an independent review panel every five years, with the first review to be completed in 2011. An Issues Statement and Call for Written Submissions document was released in March 2011, and the final report was released in September 2011. The review focused on the high-level design of the NZ ETS, particularly in the context of international efforts to tackle climate change post-2012.[18]

The report's major recommendations include:

  • phasing out the two-for-one arrangement over three years, so that only in 2015 will businesses have to surrender one emissions unit for each tonne of emissions
  • a $5 per year increase in the price cap from 2013 (instead of no price cap)
  • that the agricultural sector should still enter in 2015, but should initially be granted a two-for-one allowance
  • changes to the domestic ETS forestry accounting rules[111]

In April 2012, the Government released a consultation document in response to the review. The Government intends to introduce amending legislation in July 2012, with the aim of passing it by the end of 2012.[112] The National Business Review considered that in spite of the "fairly cryptic" nature of the Government's response to the review of the emissions trading scheme, it was likely that pastoral farming emissions would not enter the NZ ETS until 2018.[113]

After considering the recommendations of the ETS review, the Government passed a series of amendments to the scheme. The Climate Change Response (Emissions Trading and Other Matters) Amendment Act 2012, among other things, extends the two-for-one transitional measures beyond 2012, removes the start date for agriculture, introduces an offsetting option for pre-1990 forests, introduces a power whereby the government can sell NZUs at auction within an overall cap, and finally changes the treatment of the synthetic greenhouse gas sector under the scheme.[114] The changes were made to:

"maintain the costs that the ETS places on the economy at current levels. This will ensure businesses and households do not face additional costs during the continued economic recovery; and that New Zealand continues to do its fair share on climate change."
"make a number of important changes designed to improve the operation of the ETS, providing more flexibility for forest landowners and ensuring the scheme is 'fit for purpose' after 2012."[114]

Trading[edit]

On 6 December 2007, the New Zealand Emission Unit Register (NZEUR) was established. The NZEUR has the role of issuing, holding, transferring and retiring emission units in terms of the Kyoto Protocol. The initial use of the NZEUR was to record Kyoto emission units allocated to firms enrolled in the Ministry for the Environment’s Projects to Reduce Emissions and Negotiated Greenhouse Agreements programmes, and the Ministry of Agriculture and Forestry’s Permanent Forest Sink Initiative.[115]

2008[edit]

At 31 December 2008, the NZEUR had 128 registered account holders. All were foresters except for four energy companies. 45 of the foresters reported removals (sequestration) of 692,583 tonnes of CO2-e and 692,583 NZUs were issued into the market.[116]

2009[edit]

In 2009, forestry companies were selling units to NZ and international buyers. Forester Ernslaw One converted 520,000 NZ units into Assigned amount units and sold them to the Norwegian Government. Industry sources estimated the prices were approximately $21 to $22 a tonne and that value of the trade would have been between $10.9 million and $11.4 million, depending on the exchange rate. Ernslaw One had also sold 50,000 units at $20 (sales value about $1 million worth) to a NZ buyer.[117] In the year to 31 December 2009, 97 mandatory NZETS participants and 380 voluntary participants (largely post-1990 foresters) were added as NZEUR account holders. Foresters reported removals (sequestration) of 4,460,095 tonnes of CO2-e. Some foresters surrendered 4,526 NZUs for emissions from deforestation. 4,460,095 NZUs were issued into the market.[118]

2010[edit]

At 31 December 2010, there were 96 mandatory NZETS participants and 1,216 voluntary participants of which 1,195 were post-1990 foresters. Foresters reported removals (sequestration) of 9,445,606 tonnes of CO2-e. The quantity of emissions reported was 33,410,389 tonnes of CO2-e for the 2010 calendar year and 16,286,618 tonnes of CO2-e were reported for the NZETS compliance period from 1 July 2010 to 31 December 2010. Due to the two tonnes for one NZU arrangement, emitters surrendered 8,303,660 NZUs for their emissions. 12,776,026 NZUs were issued by free allocation into the market.[119]

2011[edit]

In January 2011, market prices for NZ Units were set by the international price for Certified Emission Reduction (CER) units. In March 2011, European concerns over the implications of the Fukushima nuclear disaster for their nuclear reactors reduced atomic power generation and increased coal thermal generation. This caused extra demand for CERs in the European Union Emission Trading Scheme and CER prices exceeded $NZ25 a tonne, the effective price cap in the NZ ETS. NZ buyers switched from the more expensive CERS to cheaper NZUs and which were traded at a record price of more than NZ$21 per tonne.[120] In July 2011, concerns over the Eurozone sovereign debt crisis and large issues of CERS caused international CER prices to fall to a range between 9 and 10 euros. NZU prices fell to $NZ16.[121]

For the 2011 calendar year, forest removals (sequestration) were 13,820,979 tonnes of CO2-e and the quantity of emissions reported was 31,803,198 tonnes of CO2-e. 11,596,460 NZUs were issued by free allocation into the market. Due to the two tonnes for one NZU arrangement, emitters surrendered 16,381,479 units for their emissions.[122] Emitters made a large switch from NZUs to cheaper international units. Of the 16.3 million units surrendered, 11.7 million units (or 72%) were imported international units (being 4.2 million CERs 4.3 million ERUs and 3.2 million RMUs.[123]

2012[edit]

At 21 June 2012, there were 286 mandatory NZETS participants and 2,264 voluntary participants of which 2,254 were post-1990 foresters.[122] In August 2012, the European carbon prices were still very low, dragging the NZU price to $NZ4.55 per tonne of carbon.[124] In mid September 2012, NZUs were selling for $NZ4.20 a tonne.[125] In late October 2012, New Zealand carbon prices dropped to about $NZ1 a tonne for some types of credits.[126] On 10 December 2012, the NZU spot price was $2.70 and it had declined by 72 percent over the 2012 year.[127]

See also[edit]

References[edit]

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Further reading[edit]

External links[edit]